TOPIC 1

Introduction to the Accounting Environment

Part 2
The Financial Reporting
Environment
-Malaysia
-overview of
development in
accounting concepts and
principles

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Malaysia’s Perspective

Companies Act 2016 replaced Companies Act 1965

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Financial Reporting Environment
Corporations/ Preparers
of Financial Statements
Purpose
Public and Investor relations
(communicating Financial and
operating performance)
Concern
Maintenance
Legal risks
Confidentiality
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Regulators/ Legislative
bodies and Enforcement
Authorities
Purpose
Reducing information disparity
Protecting public interest
Concerns
Standards setting
Monitoring and Enforcement
(Through Companies Act
and through its prescribed
schedules. Compliance with
stock exchange authorities
etc)
Users/ Capital Markets
Purpose
Decision Making
Concerns
Relevance and Reliability
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Accounting Development in Malaysia

• Prior to 1957 – Companies Ordinance (and amendments) of 1940, 1946, 1956.

• 1958 – Malaysian Association of Certifies Public
Accountants (MACPA) was formed.
• 1965 – Establishment of Companies Act, 1965.
• Companies ordinance were then repealed. Contain Ninth Schedule (disclosure
requirements).
• 1967 – The Malaysian Institute of Accountants
• (MIA) was established under the Accountant Act,
• 1968 – MACPA issued first accounting guidance

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Accounting Development in Malaysia
• 1968 – MACPA issued first accounting guidance
which dealt with specimen company accounts.
• 1978 – MACPA was admitted as a member of
International Accounting Standards Committee
(IASC) and began adopting IAS.
• 1984 – MACPA issued the first Malaysian
Accounting Standard.
• 1985 – Companies Act 1965 was amended. New Ninth Schedule with more
comprehensive disclosure requirements that includes the
preparation of statement of source and application of funds

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Accounting Development in Malaysia
• 1987 – Operation of MIA were activated. MIA began issuing accounting
standards.
• 1993 – Securities Commission was established. Public listed companies are
required to show full disclosure requirements as required by SC’s.
• 1997 – Financial Reporting Foundation (FRF) and Malaysian Accounting Standard
Board (MASB) was established under the Financial Reporting Act, 1997
• 2016 – COMPANIES ACT 2016 replace Companies Act 1965

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 Development of accounting concepts
and principles

The development of accounting practices over the 20th century have been
identified by theorists:

1. Management contribution phase.

2. Institution contribution phase.

3. Professional contribution phase.

4. Overt politicization phase.

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 …(A):Management contribution phase (1900-
33)

• Arose from the increasing number of shareholders and the

dominant economic roles played by industrial corporation after
1900

• The diffusion of share ownership led to more pronounced

separation of ownership (the shareholders) from the
control(managers) of the organization.

• Impact; gave management more or less complete control over

the format or contents of accounting disclosure.

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..Management contribution phase (1900-33)

There are five consequences of the dependence on

management initiative:
1. Practices lacked theoretical support.

2. The focus was on the determination of taxable income and

minimization of income taxes.

3. There was a desire to smooth earnings.

4. They avoided complex problems, and adopted expedient solutions.

5. There was no consistency as different firms adopted different

accounting techniques for the same problem.

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 …….Management contribution phase
(1900-33)
• Some of the Issues arose/ debate

1. Improvement in standards of financial reporting

2. Protection of investors

3. Agree to publish annual financial statements

4. Question of accounting for interest cost

5. Calculation of taxable income on the basis of cash receipts and disbursements

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…(B): Institution contribution phase
(1933-46)
• The creation and increasing role of institutions in the
development of accounting principles

• In the United States, the developments included;

1. the creation of the Securities and Exchange Commission
(SEC) in 1934
2. the approval by the American Institute of Accountants (AIA)
of ‘six rules or principles’
3. the new role of the Committee on Accounting Procedures.
(Refer page 6&7 text book)

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…(C):Professional contribution phase (1959-
73)
• Discontent with the Committee on Accounting Procedure (CAP)
was expressed by the president of the AICPA.
“ how successful we have been in narrowing areas of
difference and inconsistency in the preparation and
presentation of financial information”
• A Special Committee on Research Program was set up and
proposed the dissolution of the CAP and its research
department.
• The AICPA accepted the recommendations of the Committee
and established the Accounting Principles Board (APB) and the
Accounting Research Division.
- Criticized and dissatisfaction ?

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 D:Overt politicization phase (1973-
present)

• Adoption of a more deductive approach (Normative theory) as well as an

ever-increasing politicization of the standard-setting process.
• Generally accepted view: accounting numbers affect economic behavior and,
consequently, accounting rules should be established in the political arena.
• The FASB’s and IASB’s conduct is to develop a theoretical framework and the
general acceptance of new standards.

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…(D): Overt politicization phase (1973-present)

The process of formulating accounting standards is becoming

political; for instance:
• The US Senate Subcommittee released a report entitled The
Accounting Establishment. Known as the Metcalf Report, it
charged that the United States’ ‘big eight’ accounting firms
monopolies the auditing of large corporations and control the
standard-setting process.
• The passing of the Sarbanes-Oxley Act in 2002, also known as
the Public Company Accounting Reform and Investor Protection
Act of 2002, Sarbox or SOX.

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 RECENT Development in
Accounting Theory
• Academic and professional developments in
accounting theory have tended to take different
approaches
• Academic research focuses on capital markets,
agency theory and behavioural aspects
• The profession has sought a more normative
approach – what accounting practices should be
adopted

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• Conceptual framework – resurrected in
1980s
• states the nature and purpose of
financial reporting
• Establishes criteria for deciding
between alternative accounting
practices
• SACs 1–4

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• Conceptual framework – Recent Developments
• Joint project between IASB & FASB
• International harmonisation of accounting practices
through a single consistent set of international financial
reporting standards (IFRS)

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• The conceptual framework underpinning the IFRS
favours a move toward
• accounting practices that provide information
for enhancing decision making by investors and
others
• recognising all gains and losses in the accounting
periods in which they occur
• measurement using exit values

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 The importance of accounting
history (USE OF PPP)
• Pedagogy – to a better understanding and appreciation of the field
of accounting and its evolution as a social science. (Instructional
theory)

• Policy – instrumental to a better understanding of the accounting

problems and the institutional contexts as well as the formulation
of public policy (e.g tax accounting & policy)

• Practice – provide a better assessment of existing practices by

comparing with the methods used in the past.
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 Relevance of accounting history

• Accounting has a history which is usually discussed in terms of

one seminal event, the invention and dissemination of the
double-entry bookkeeping processes.
• The historical evolution of accounting provides clues and
explanations of double-entry bookkeeping and the development of
modern accounting.
• The history of accounting allows us to relate the past to what is
practiced and to what ought to be practiced.
• It helps us to make a link between the historical state and both
positive and normative states.
• The link supports the view within the full context of social, political,
economic and temporal environments.

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Limitations of Accounting History

• Historical inquiry could either be narrative or interpretative

and is conditional and not definitive –
• It may be incomplete.
• History may not reveal cause of an event as a certainty but can
indicate probable factors affecting the event.
• Historians ‘explanation and causal analysis’ begin with
searches for patterns of development –
• Attempts to proceed from determination (what happened) to
a contingency (how it happened) basis – judgmental process
constrained by time

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THE END

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